Romney and the VAT

posted at 9:50 am on December 27, 2011 by Ed Morrissey

See what happens when we take a couple of days off for the holidays? We missed this interview with Mitt Romney talking about tax policy with the Wall Street Journal, and which may create some mild headaches for the frontrunner in the next few days. The wide-ranging interview touched on many issues as well as campaign themes and the “vision thing,” to use a phrase that hearkens back to the first Bush presidency. Romney wants to push a theme of reform, and in that vein talked about his ideas for comprehensive tax reform, a subject that has the possibilities for wide bipartisan support — or for political disaster, depending on what kind of reform one proposes. He tried to stick to broad, general principles, but the WSJ pinned him down on the idea of a consumption tax:

What about his reform principles? Mr. Romney talks only in general terms. “Moving to a consumption-based system is something which is very attractive to me philosophically, but I’ve not been able to sufficiently model it out to jump on board a consumption-based tax. A flat tax, a true flat tax is also attractive to me. What I like—I mean, I like the simplification of a flat tax. I also like removing the distortion in our tax code for certain classes of investment. And the advantage of a flat tax is getting rid of some of those distortions.”

Since Mr. Romney mentioned a consumption tax, would he rule out a value-added tax?

He says he doesn’t “like the idea” of layering a VAT onto the current income tax system. But he adds that, philosophically speaking, a VAT might work as a replacement for some part of the tax code, “particularly at the corporate level,” as Paul Ryan proposed several years ago. What he doesn’t do is rule a VAT out.

Amid such generalities, it’s hard not to conclude that the candidate is trying to avoid offering any details that might become a political target. And he all but admits as much. “I happen to also recognize,” he says, “that if you go out with a tax proposal which conforms to your philosophy but it hasn’t been thoroughly analyzed, vetted, put through models and calculated in detail, that you’re gonna get hit by the demagogues in the general election.”

That also seems to explain his refusal to propose cuts in individual tax rates, except for people who make less than $200,000, which not coincidentally is also Mr. Obama’s threshold for defining “the rich.”

The VAT is political dynamite, as Romney well knows, for a number of reasons. Europe relies on both VATs and income taxes for individuals and corporations, which has fueled government expansion and allows for easy revenue increases by tax-hiking politicians — to which we will return in a moment. Nancy Pelosi floated the idea two years ago of an additional VAT to fund ObamaCare, which had conservatives seeing red at the time and which no doubt helped paint the midterms red in 2010, in at least some small part.

On the other hand, a number of conservatives prefer the Fair Tax as a replacement for the income tax, and the Fair Tax is arguably a version of a VAT, at least in practice. The difference between that and Pelosi’s proposal was that Pelosi did want it layered onto the existing tax system, because she wanted a lot more revenue to fuel big-government programs like ObamaCare. Fair Tax proponents want to eliminate the personal income tax before imposing the consumption-based Fair Tax, which sounds very similar to what Romney proposes to do, only doing so on the corporate income tax instead of the personal income tax.

Jim Pethokoukis says that conservatives should keep an open mind, as such a switch would promote the kind of job-creating investment that the US is missing now:

Yet Romney is certainly correct that the U.S. tax system should reduce the current bias against investment. Many economists on the left and right would agree that America has consumed too much and invested too little in recent years. Many studies have suggested that replacing the income tax system with a consumption tax could boost economic growth over the long-run by 5 percent or more, increasing tax revenue by 1 percent of GDP via that increased growth — not by increasing the tax burden. Some economists here at AEI like the idea of the Bradford X tax, a graduated consumption tax that eliminates investment taxes.

You can have a value-added tax that is economically efficient, pro-growth but does not have the transparency issues that Norquist and other small-government advocates worry about. Many flat taxers, for instance, like the 19 percent Hall-Rabushka flat tax, a plan which has served as the model for many flat tax proposals. As with the X tax, businesses under a Hall-Rabushka system would deduct cash wages from the cash flow on which they calculate the VAT.

Romney is right that Ryan has proposed replacing the current corporate income tax with a business consumption tax in his Ryan Roadmap. The plan says a BCT would “enhance the international competitiveness of U.S. businesses and put the economy on solid footing to meet the challenges of the 21st century.”

As long as a consumption tax is a) transparent and b) not just slapped on top of the current tax code, it is definitely worth considering as a critical way of boosingt U.S. growth.

Daniel Mitchell at Forbes says any VAT would be a disaster, and an entree to big-government financing no matter how it’s structured:

For those who are not familiar with a VAT, it is a version of a national sales tax, but imposed at every stage in the production process and embedded in the price of goods and services. Perhaps more important, it is despised by everyone who wants to limit the size of government. …

Any politician that supports a VAT (or even hints at supporting a VAT) should not be allowed anywhere near the White House. That applies to Mitt Romney. And it should be the rule for Paul Ryan as well.

Mitchell offers this video from his Econ 101 series, first launched when Pelosi proposed the idea of adding a VAT:

However, this objection — as Mitchell states in the beginning of the video — is based on adding a VAT, not replacing an income tax with a VAT. Mitchell acknowledges that a VAT system “does less damage per dollar collected” than income taxes, and that replacing the income tax with a VAT would make those arguments “persuasive.”

Would it work? Perhaps not, and be sure to watch the whole video for the shortcomings of VAT systems, but I’m not sure it’s as anathema as some people have treated this statement. I’m open to ideas that aim at promoting capital investment and getting government out of the income stream if it can be done effectively and with stringent limitations on tinkering.

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